Thursday, January 27, 2011

An Auckland airport report estimates the airport corridor’s contribution to the economy for the next 20 years, but outrageously fails to even mention the future risks to the airline and tourism industries of higher oil prices and/or fuel shortages.

The report by Market Economics simplistically takes tourism and freight growth figures for past decades and projects these into the future. Based on these historic patterns it suggests a business as usual scenario where international and domestic travel will generate $17-24 billion by 2031, with a cumulative difference in growth between 2006 and 2031 of 19%.

But nowhere in the report -- I repeat nowhere -- is there any mention, let alone discussion, of the risks to the airline and tourism industries of rises in global oil prices in the next 20 years. As for the possibility of aviation fuel shortages, this is also completely beyond the pale for the report's authors.

Even under the "low growth" scenario, the protection is for the airport “corridor” to grow faster than the region by 10%. You will search in vain for any suggestion that there could be a no growth or negative growth scenario arising from a constrained world oil supply. And yet it was only in 2008 that scores of airlines went broke due to rapidly rising oil prices, and the numbers of tourists flying to New Zealand fell sharply.

These gaping holes in the analysis of the Auckland airport report mean it lacks any credibility. It seems to be following a trend evident in other recent reports -- for example a report by Venture Taranaki on the contribution of the oil and gas industry to the local and New Zealand economy, and the “head in the sand” approach of the government in its Energy Strategy and Defence White Paper. In all of these reports the impending oil shocks and possibility of fuel shortages are simply ignored.

Unlike the Airport report this paper provides a robust economic framework for understanding the effects of higher oil prices on New Zealand tourism.

The report makes the following cogent points:

1. In the tourism industry, the ability to substitute oil for other sources of energy is relatively low. This is particularly true in aviation, where the price of oil will continue to be a major cost driver for airlines and therefore a key determinant of the price of air travel for the foreseeable future. Recent efforts by Air New Zealand to use Jatropha as an aviation fuel may literally fall on stony ground. Jatropha a biofuel-producing plant once touted as a wonder-crop, is turning out to be much less dependable than first thought.

And there is zero prospect of electric planes.

The graph from the tourism report shows fuel costs as a percentage of commercial airlines’ operating costs and crude oil prices. Over the past decade, fuel has approximately doubled as a percentage of airline operating costs, in line with the change in oil prices over the same period. The close relationship between fuel costs and crude oil prices reflects the limited ability of airlines to reduce their fuel usage.

Fuel costs as a percentage of an airline’s operating cost are disproportionally high for long haul flights, -e in the order of 30%. New Zealand relies on long haul flights for 60% of incoming tourists, so will be more severely impacted than other destinations.

2. An examination of past oil shocks clearly demonstrate that countries that are net importers of oil have, and will experience lower incomes and other negative economic effects from higher oil prices.

These findings are relevant for international tourism to New Zealand. The second graph shows the top ten countries of origin for international visitor arrivals to New Zealand and the percentage of net oil imports or exports in their GDP. Only Canada is a net oil exporter. All other countries are net oil importers. The Asian countries are the most exposed and therefore potentially most likely to be affected by income effects of higher oil prices, yet they are often touted as markets from which future tourism growth will occur.

3.Tourism is a luxury good and is therefore relatively income-elastic. Income changes have quite a large effect on the demand for international tourism, not only for trip generation, but also with respect to level of expenditure, length of stay and type of trip.

4.Long distance destinations are more dependent on high-income tourists than short haul destinations. There is a strong correlation between consumption spending in origin markets and tourist arrivals to New Zealand.

All of these factors, and many others identified in the tourism report, point to the New Zealand airline and tourism industries facing extremely turbulent times in the next 20 years. There is a very real chance that these industries will face zero or even negative growth in the years ahead. But investors or anyone alse reading the Auckland airport report will have no inkling of this possibility , and cannot help but be misled by its grossly ill-informed and over-optimistic projections.

5
comments:

One cannot help thinking that these spurious reports that appear from time to time are not aimed at the bona-fide potential investor, who ought to hava a better grip on future business conditions or deserve to lose their shirt, but rather at the general public as a part of a broader agenda of disinformation in order to maintain the cosy illusion of wellbeing until they find themselves standing on the precipice of the pit of economic collapse. As with all corporate businesses these days, the CEO and his immediate cabal (It will be they who dictated the rosy outlook of this report) will be directing their efforts towards maximising the balance sheet on a short term basis as this is what determines their remuneration. Strategic planning is absolutely at the bottom of their priority list.

G'day, Denis, This blog has reminded me of a paper I found on the Internet several years ago (now mislaid) in which an analyst took a similar report by the UK Dept of Transportation. Their optimistic projection of incoming tourists prompted the proposed building of the third runway at Heathrow. The analyst used the number of tourists arriving from North America to calculate the number of seats which would have to cross the Atlantic and then the tons of fuel which would have to fuel those seats. His analysis suggested that there would be insufficient fuel in the world for that volume. But nobody had included a fuel analysis in the report, just projected the trend from the past into the future. Ludicrous! Cheers, Carl HornNelsoncarl.horn.nelson@gmail.com

Post a Comment

Why this blog?

Most kiwis are oblivious to the next global oil shock, which many experts say will occur within 5 years. Even a small decline in world oil production will have a devastating effect on our economy. Oil depletion is rarely discussed in public by politicians, or by mainstream economists or media. This blog is my small effort to probe, raise awareness, encourage informed debate, and look at community responses.